The Most Forgotten Tax Deductions Business Owners Should Take
The most underused write-offs and tax deduction strategies entrepreneurs should consider.
When I review a client's tax return, I always try to grab the low-hanging fruit first- -- simple, easy deductions that can quickly have a big impact on my clients' bottom lines. Here's my power list of the most underused write-offs and tax deduction strategies business owners should consider:
Technology, electronic equipment and supplies
Electronics, tech, and supplies can be big write-offs. You can write off your phones, computers, laptops, drones, cameras, iPads, speakers, video cameras and any equipment or supplies used for your business. These expenditures can be critical to running a business, and most of them can be fully expensed. As long as you can show it's 100 percent for business use, it's a 100-percent write-off. On certain items, you might want to bring it down a notch if you also use it for personal reasons and say it's 80 percent or 50 percent for business use.
Phone and internet service
In addition to writing off the cost of your phone and computer hardware, you can also write off your service for these devices. Smartphones and in-home (or in-office) WiFi and/or internet can dramatically increase productivity and are critical for social networking and other marketing-related strategies. And don't underestimate their deduction power: Recent rulings allow business owners to write off 100 percent of their mobile phone service as long as they have at least one dedicated home phone line.
As for internet service, you can possibly deduct 100 percent of it. If the service is for your home office, you might not use the full 100 percent since your family may be using it, too, but you can at least claim some percentage for business use.
Unlike meals, which are limited to 50 percent, travel expenses are 100-percent deductible. These include airfare, hotel, house or room rentals through services like VRBO and Airbnb, rental cars, valet parking, taxis, rideshare trips through vendors like Uber or Lyft, trains, tolls, etc.
Here are five ideas to make your travel a write-off:
- Meet with a client. Find the opportunity to meet with a client every time you travel.
- Meet with a vendor. Do you have a supplier or support professional you could meet with when you're on the road?
- Attend a conference or training event. In almost every major U.S. city, there are investment clubs, real estate clubs, professional organizations or conferences, and continuing education courses. These are great places to find educational and networking opportunities, as well as have a business purpose for your travels.
- Check on your rental property. Is there a good rental market where your siblings, grandparents, children, or grandchildren live? Once you purchase the property, trips to the area will always be a deduction if you're checking in with tenants or the property manager or working on the property.
- Hold your annual board of directors, shareholder, or member meeting. Some people see their annual meeting as a burden, but I see it as a great opportunity for a tax-deductible trip.
Be aware that things can get sticky if you try to combine business with too much pleasure. Only deduct expenses for travel days and days you're doing actual business. "Doing business" may be a required meeting, but if you're on the road for more than a couple days, it's good to rely on the rule that doing business would be actual work for four hours or more.
Dining and entertainment
Meals should really constitute a healthy line item on a small-business owner's tax return. So much business is completed over food, and it's important to track these expenses. However, the TCJA legislation that went into effect in 2018 contained significant changes with dining and entertainment.
There used to be types of meals/food/dining experiences that could be 100-percent deductible, but most dining deductions are now restricted to 50 percent because the IRS feels strongly that everyone needs to eat, whether at work or not.
With that said, do your best to write off all your meals even if you don't have the receipt (For future audit protection, however, try to save, take photos of, or scan all receipts). Here are the types of meal experiences and how they're deductible:
- Meals discussing business with someone else. Dining expenses are always a write-off (limited to 50 percent) when discussing business with a partner, client, potential client, or vendor. Record all expenses, including tips, food, and the bar tab. If you opt to only turn in your portion of the meal (because you split the check), deduct 50 percent of your portion only.
- Meals by yourself while traveling. Another overlooked savings strategy is to write off dining by yourself when you're traveling. This "traveling/dining" deduction is defined as times when the taxpayer is doing business outside their normal commute or where they operate their business. Again, this is limited to 50 percent.
- Food provided in the workplace. All are now limited to 50 percent. This typically includes items like bagels on Friday, the coffee maker, and even a company cafeteria.
- Food with an event or presentation for customers. This 100-percent-deductible food includes things like wine and cheese at a realtor's open house, a training workshop for customers that included lunch, or even a booth with food at the mall to attract customers. Track this separately so it doesn't get cut in half by your accountant thinking it's typical dining limited by 50 percent.
- Special company events for employees. There are still a few limited circumstances in which you can get a 100-percent deduction when providing food for employees. The most common example would be a company holiday party, a training activity with food to inspire teamwork, or an experience as a reward for employees. The majority of those attending need to be legitimate employees or vendors and can't be business owners or their family.
Entertainment is a different story. Before the 2018 tax code change, you could have deducted entertainment with your partners, employees, board members, vendors, and even customers at the same rate of 50 percent. Now, however, that is no longer the case. The good news is, it's only a temporary provision until 2023 and we'll hopefully get this deduction back.
Be sure to keep good records and include a business purpose for every expense listed above. Awareness and tracking procedures are critical as these deductions tend to be the most forgotten for the very reason business owners aren't focused on saving money as much as making money. Making money and saving money are the Yin and Yang of business ownership. Don't miss out by forgetting these incredible write-offs!
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